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Agenda
• Issues with collection of CGT from foreign
residents
• Introducing the new provisions
• Application of withholding provisions to real estate
• Application of withholding provisions to options
and indirect real property interests
• Clearance certificates, declarations and variations
• Case study
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History of CGT for foreign residents
• Foreign residents are required to pay CGT in Australia on
CGT event that occur in relation to;
• Taxable Australian Real Property
• Indirect Australian real property interests
• Options or rights to acquire the property or interests above
• This does not work - to quote from the EM which
introduced the CGT withholding tax legislation;
• there is an extremely low rate of voluntary compliance from foreign
resident taxpayers and it is highly difficult to enforce by the ATO
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Key withholding provision: section 14-200
• You must pay the Commissioner an amount if:
• you become the owner of a CGT asset as a result
of acquiring it from one or more entities under one
or more transactions; and
• the CGT asset is taxable Australian Real Property;
or
• at least one of the transferors is a relevant foreign
resident; and
• the CGT asset is an indirect Australian real
property interest or an option
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Some important terms used in the provision
• You must pay
• there is no requirement to withhold just to pay
• ‘if you acquire’ – defined in section 109 of the
1997 Tax Act
• you ‘acquire’ an asset when you become its owner
• transfer of property as a result of a family court order
• passing of the asset to an executor of an estate or to a
beneficiary of an estate
• other CGT rollovers or CGT small business concessions
• Legal or equitable ownership? – ATO’s current view is that
withholding provisions relate to legal ownership - change of
trustee
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Some important terms used in the provision
• ‘one or more transactions’
• transaction
• ‘CGT event’ is not used in the provision
• transaction is not defined in income tax
legislation
• clearance certificates and declarations
• acquiring a CGT asset from one or more
transferors
• two entities acquiring an asset as tenants in
common or joint tenants
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Some important terms used in the provision
• CGT asset is Taxable Australian Real Property (TARP)
• Real estate located in Australia
• You must withhold regardless of whether you are acquiring from a
foreign resident
• indirect Australian real property interest or options
• Membership interests (shares or units)
• Passes the “non-portfolio interest test”
• 50% of the market value of assets are attributable to real estate in
Australia
• you must withhold if one of the transferors is a ‘relevant foreign
resident’
• Options to acquire TARP or indirect Australian real property
interests
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Withholding an amount
• The withholding legislation effectively transfers the
obligation to collect tax from the ATO to the purchaser
• If no tax is withheld and there should have been – the
purchaser is liable
• 10% of the first element of the cost base of the CGT asset
• Generally this will be the purchase price of the entire
CGT asset that is being transferred
• CGT rollovers – 10% of the cost base that is passed to
the acquirer
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Withholding an amount
• Does the legislation give the acquirer the power to
withhold?
An entity is discharged from all liability to pay so much of the total
amount payable to acquire a CGT asset as is equal to any amount
the entity pays to the Commissioner under Subdivision 14-D in
relation to the acquisition.
• Consider whether the agreement, order or
transfer gives the acquirer the right to withhold
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Commissioner’s Variation Power
• The Commissioner is able to exercise discretion
to vary the amount payable: section 14-235.
• Variations can be requested by:
• the purchaser of the CGT asset;
• the vendor of the CGT asset; or
• an entity that is owed a debt by the vendor.
• Variations must be applied for as soon as
practicably possible in the sale process. In any
case, well before the settlement date: LCG
2016/5.
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Commissioner’s Variation Power
• Circumstances in which the Commissioner
may exercise the discretion to vary include:
• Where the vendor makes no capital gain;
• Same asset roll-over;
• Marriage or relationship breakdown roll-over;
• Roll-over for business restructure;
• Where the vendor will not have an income tax
liability for the income year;
• There is a mortgage over the CGT asset; and
• Foreclosure.
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Basic Withholding – real estate
• Excluded transactions:
• The acquisition of real property where the
market value of the CGT Asset just after the
transaction is less than $2 million
• CGT Asset
• can be a part interest in real estate – joint tenants or
tenants in common
• what if you were acquiring 50% of a property that
you already own a 50% interest in?
• what is the market value of a property that is being
transferred below market value?
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Basic Withholding – real estate
• Clearance certificates – these certify that there
is nothing to suggest that the entity disposing of
the property is a foreign resident
• An acquirer does not have to pay if, before you
are required to pay you are given a valid
clearance certificate by all entities disposing of
the property.
• A valid clearance certificate is;
• issued by the ATO; and
• is for the period covering the time the transaction
was entered into.
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Basic Withholding – clearance certificate
• Online application form – includes both the
contract date and the proposed settlement date
• Joint tenants or tenants in common – each party
needs to supply a clearance certificate
• Certificates cover a twelve month period.
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Case Study - part one
• Donald and Hillary decide to jointly purchase a
holiday home at Noosa for $2.1 million. The property
is currently owned by two people as joint tenants.
• Are there any withholding tax issues?
It depends on what is meant by ‘just after the transaction’ and ‘CGT asset’.
The ATO would say ‘yes’.
• If there are withholding issues, what is the amount that needs to be paid
by Donald and Hilary to the ATO?
10% of the first element of the their cost base after settlement - $210,000
• Are the purchasers able to withhold from the purchase price at
settlement?
It depends. Purchasers needs to make sure that there is a right to withhold
within the contract.
• What if one of the vendors is a foreign resident?
Obtain a variation from the ATO.
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Basic Withholding – indirect real property interests
Transaction is on approved stock exchange
Transaction is conducted using a crossing system
An amount is already required to be withheld
Security lending arrangements
Transaction arises in insolvency or bankruptcy
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Basic Withholding – indirect real property interests
Obligation to withhold - indirect Australian real
property interests
Sale of shares or units
Exception - approved
stock exchange
Other minor exceptions -
eg. already required to
be withheld
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Basic Withholding – indirect real property interests
• Only required to pay if the transferor is a relevant
foreign resident
• Know or reasonably believe that the transferor is a foreign
resident; or
• Do not reasonably believe that the transferor is an
Australian resident and the transferor has an address
outside of Australia; or
• Do not reasonably believe that the transferor is an
Australian resident and you are authorised to make a
payment outside Australia; or
• transferor has a connection outside Australia specified in
regulations
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Basic Withholding – indirect real property interests
• Residency or interests declaration from
each entity disposing of their interests
• Applies to indirect Australian real property
interests and options to purchase real estate or
indirect Australian real property interests
• Declarations can declare:
• The entity will be an Australian resident; or
• The share or units are not indirect Australian real
property interests
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Basic Withholding – indirect real property interests
• Declarations must be:
• in writing;
• Can be valid for a period of six months;
• for the period of time the transaction is entered
into; and
• received by the acquirer before settlement.
• Protection
• A valid declaration protects the acquirer
provided that they do not have actual
knowledge that the declaration is false
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Case Study - part two
• Donald and Hillary decide to sell ½ of their Units (25% of
the total units) in the Presidential Unit Trust for $200,000.
• Are there any withholding tax issues?
Potentially. There is no $2 million dollar threshold. Are Donald or Hillary
‘relevant foreign residents’? Are the units indirect Australian real property
interests?
• What can the purchaser do to mitigate the risk?
Obtain a declaration from both Donald and Hillary. This does not have to be
a separate document but can be incorporated into a sale agreement.
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Case Study – change of trustee
• Donald and Hillary decide that they would like to change the
trustee of the trust to Whitehouse Pty Ltd
• Are there any withholding tax issues?
Potentially. The ATO view is that the withholding provisions apply to legal
transfers of property. When there is a change of trustee there is a legal change of
ownership.
Withholding provisions based on ‘acquisitions’ – change of trustee is not an
acquisition because there is no change of ownership.
• To which assets in the trust would withholding potentially apply?
Residential property – Is the market value $2 million or more?
Shares in ASX listed companies? No.
Shares in Republican Pty Ltd? It depends. Are Donald and Hillary ‘relevant
foreign residents’? Are the shares indirect Australian real property interests?
• What if either Donald or Hillary were foreign residents?
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CGT and family court orders
• CGT roll-over section 126-A
• connection with a breakdown of a relationship
• no reasonable likelihood of cohabitation
• transfer of assets to spouse
• Court order or financial agreement
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Case Study – marriage breakdown
• Donald and Hillary’s marriage breaks down and
they negotiate the following consent orders:
• the family home in Brisbane is transferred to Hillary;
• the holiday home is transferred to Donald;
• the units in Presidential Unit Trust are transferred to
Donald’s newly established family trust; and
• the avocado farm is transferred to Hillary’s SMSF
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Case Study – marriage breakdown
• Are there any withholding tax issues?
Yes. All of the real property potentially has a market value of $2 million or
more. A clearance certificate is required despite there being no capital gains
tax payable if the automatic rollover applies.
Donald and Hillary should also probably make declarations in relation to the
units in the Unit Trust
• What if Donald left Australia after the marriage breakdown
and was a relevant foreign resident?
Donald could not obtain a clearance certificate and therefore Hillary, the
SMSF and Donald’s family trust would be required to pay 10% of the cost
base of each property to the ATO.
If CGT rollover applies the cost base would be the original purchase price, if
not the market value of the entire property.
Obtaining a variation from the ATO would be an option.
This should be dealt with in the orders.
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Other Circumstances
• What if Hillary or Donald died?
CGT withholding would apply to the transfer to the executor and to
beneficiaries.
CGT withholding would apply to transfer of joint tenancy
• What happens if the acquirer does not pay an
amount to the ATO?
The acquirer must pay a penalty equal to the amount that they were
required to pay. It is likely that they will not be able to recover this amount
from the transferor.
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Practical Steps
• To mitigate this withholding risk for:
• Units, shares or options - get a declaration from the
transferor(s) – this protects the purchaser provided they
do not actually know that the declaration is false
• real estate – get a clearance certificate from the
transferor(s)
• Must be done before settlement
• Obligations should incorporated into the
agreement, order or deed.
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Practical Steps
• Clearance certificate
• There is an online application process
• Usually 2-3 days but can be more if circumstances are
not typical
• Valid for 12 months
• Declaration
• Australian Resident; or
• Shares or units are not indirect taxable Australian
property
• No specific form, no submission to the ATO
• The ATO have provided a template declaration on their
website
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Practical Steps
• If payment must be withheld
• Payment must be made to the ATO on or before the
changed of ownership – settlement
• Acquirer must register online – they will receive a
payment reference number- will need to use this
number when making the payment
• Multiple acquirers – can register together and make
the one payment
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Practical Steps
• The amount paid by the acquired is a non-final withholding
payment and is credited to the transferor’s account once it
is paid.
• Transferor can claim tax credits on withholding tax already
paid
• Has the transferor correctly been identified by the acquirer
NB. The transferor is only able to claim tax credits if the
acquirer has actually made the payment to the ATO.
